The Climate Change Authority’s gamble on political pragmatism

2 September 2016

This article by Associate Professor Frank Jotzo was originally published on The Conversation.
The Climate Change Authority’s latest report outlining a recommended climate policy “toolkit” is a reflection of what is seen by many as politically feasible in Australia now. But it is piecemeal and lacks a vision for the longer-term policy framework needed to get Australia on track to a low-carbon economy.
After years of political fighting over carbon pricing, a conventional emissions trading scheme - the instrument of choice in many other countries - is widely seen as politically impossible in Australia. And both major parties are scared of any policy that is seen as raising electricity prices.
The CCA seems to take this political situation as a starting point, and makes a series of judgements about specific policy options. The intent clearly is to help policy progress in the medium term. But it risks locking in a policy suite that will not deliver much, or may cost too much.
If the CCA’s recommendations are misconstrued as being ambitious, we could end up with policy that falls far short of these recommendations. And if its political judgements are off the mark, the CCA’s specific recommendations could become an obstacle for the government’s 2017 policy review.
Electricity intensity scheme
The CCA’s “toolkit” suggests a mix of different policy instruments for different sectors of the economy, with quite specific suggestions in some areas and less detail in others.
For the power sector, the recommendation is for an “emissions intensity scheme”, designed to create a carbon price signal in electricity production while limiting the effect on power prices. This is its main selling-point: it would result in less price uplift than a standard emissions trading scheme or carbon tax.
The flipside is that this does not encourage households and businesses to save energy, and so without other interventions it will be less efficient.
Another serious downside is that the government earns no money from the scheme because all permits are given out for free to industry. So there is no source of income to cut other taxes and help low-income households, as there was under the Gillard government’s carbon price.
Such a power sector scheme is in line with what Labor took to July’s election, so there may be hope for bipartisanship. It is a scheme you choose if you are afraid of political backlash over power prices, and if you are prepared to forego fiscal revenue.
Its effectiveness will depend on its credibility and ambition. The CCA envisages it as a stand-alone scheme without trading links (except possibly sales of “white certificates” from energy efficiency schemes). The CCA recommends baselines going linearly to zero before 2050, which could drive significant change in power generation. But whatever trajectory is mandated is certain to be economically less efficient than a standard emissions trading scheme with flexibility between sectors and over time.
Renewables, innovation and coal exit
The report notes that uncertainty over the future of an emissions intensity scheme “could affect investor confidence” and cause cost increases and delays, and that this is an argument for continued support for renewable energy deployment policies. However it recommends that the Renewable Energy Target not be continued beyond the present commitment to new investments until 2020 and support for existing plants until 2030.
On innovation for low-emissions technologies, the CCA calls for government support both through debt and equity funding, as well as public funding for research, development and demonstration. The former is currently done through the Clean Energy Finance Corporation, the latter by the Australian Renewable Energy Agency (ARENA). This recommendation runs counter the government’s present plan – possibly supported by Labor – to withdraw A$1.3 billion in funding from ARENA.
Mechanisms to facilitate closure of high emissions power stations have received much support in the debate over the last year. The idea of a regulated closure scheme is rejected by the CCA, on the basis of modelling of a version of the proposal that would not allow any flexibility. The proposal for a market-based scheme to help shut down the highest-emitting power stations is mentioned only in the CCA’s accompanying electricity report, where it is dismissed without analysis.
Emissions Reduction Fund and more complexity
Outside the power sector the CCA proposes evolving the existing Emissions Reduction Fund (ERF), a patchy scheme of subsidies paid to businesses for projects presumed to cut emissions.
It suggests that industries that burn fossil fuels or otherwise release greenhouse gases should be covered by an ERF with “enhanced safeguards”. Companies that exceed a specific benchmark emissions intensity (falling over time) would have to buy emissions credits, while companies can earn credits for projects that meet the ERF’s criteria. But companies that remain below the benchmark and do not engage in projects would not be involved at all and have no incentive to cut emissions.
The government would continue to buy credits from land sector projects. This means continued payments of taxpayer dollars to businesses, and continued doubts over whether the emissions reductions are real.
For energy efficiency, yet another approach is recommended, by harmonising existing state-based “white certificate” schemes that award credits for energy savings, and then feeding those credits back into the electricity supply scheme. Selective efficiency standards are also supported, along with emissions standards for cars and perhaps trucks.
Setting our sights higher
The CCA’s report focuses heavily on Australia’s existing emissions target, of a 26-28% reduction on 2005 levels by 2030. But in reality, Australia will have to do more as part of the Paris Agreement ratcheting process. The existing target is too weak to meet the Paris deal’s global warming limit of below 2℃. The goal must be a net zero-emission economy around mid-century.
The more hodge-podge our climate policy regime, the weaker the signals to promote investment in modern, clean technologies. The incrementalism of the CCA’s proposed approach contrasts starkly with the need to drive a fundamental transformation to a low-carbon economy, and is at odds with the Authority’s own recommended carbon budget.
An apt comparison is with Australia’s economic reforms of the 1980s. The road to success was fundamental change such as floating the dollar and dismantling tariffs, not timid tinkering. Today, neither side of politics shows such vision or determination. So it is all the more important that independent bodies raise everyone’s sights to the larger possibilities.
The CCA’s judgements
The “policy toolkit” report is not supported by two of the CCA’s board members, Clive Hamilton and David Karoly, who have made it known that they will issue a dissenting minority report.
Under its previous board the CCA provided strongly principled advice for ambitious climate policy, such as its recommendations for emissions targets and a carbon budget. A report on climate policy instruments that put principle over political circumstance would almost inevitably recommend a comprehensive carbon pricing scheme as its core.
The hope for this week’s report is that it might help achieve some convergence on climate policy, albeit at a lower denominator, and encourage the government to embark on reform.
The initial signals from the government are not positive. Environment and Energy Minister Josh Frydenberg was quick to distance the government from the report. He said that there are no plans to change baselines for the “safeguards”, which would be required for the main aspects of the CCA plan.
Meanwhile the CCA has ruled out a number of options, making it harder for the government to pick up these options if it wanted to.
The pragmatic gamble could backfire.